Banner Corporation Reports Net Income of $15.6 Million, or $0.79 Per Diluted Share, in Third Quarter; Net Income Highlighted by Strong Revenue Generation and Improved Credit Quality

Banner Corporation (NASDAQ: BANR), the parent company of Banner Bank and
Islanders Bank, today reported net income of $15.6 million in the third
quarter of 2012, compared to $25.4 million in the preceding quarter and
$6.0 million in the third quarter a year ago. For the first nine months
of 2012, Banner reported net income of $50.2 million, compared to
$387,000 in the same period a year ago. In the preceding quarter ended
June 30, 2012, Banner's results included a $31.8 million tax benefit as
a result of the reversal of most of its deferred tax asset valuation
allowance, which was partially offset by a net loss of $19.1 million for
fair value adjustments.

“Banner's highlights for the third quarter included our continued
improvement in asset quality, additional customer account growth and
record revenues from core operations,” said Mark J. Grescovich,
President and Chief Executive Officer. “Similar to the second quarter,
Banner's third quarter revenues from core operations* (net interest
income before the provision for loan losses plus total other operating
income excluding fair value and other-than-temporary impairment (OTTI)
adjustments) increased 8% when compared to the third quarter a year ago.
This marks the twelfth consecutive quarter that we have realized a
year-over-year increase in revenues from core operations.* Our net
interest margin expanded 12 basis points to 4.22% in the third quarter
compared to 4.10% in the third quarter a year ago. Also, our deposit
fees and other service charge income remained strong, increasing by 10%
compared to the third quarter a year ago, and our revenues from mortgage
banking operations again increased and were more than two times higher
than in the third quarter of 2011. This progress, which is consistent
with our results for the first half of the year, further demonstrates
our strategic plan and initiatives are effective and are building
shareholder value.”

During the third quarter, Banner repurchased approximately 40% of its
senior preferred stock in private transactions at an average price of
$959 per share. As a result, Banner realized gains of $2.1 million on
the repurchases, which was partially offset by accelerated amortization
of a portion of the initial discount recorded at the issuance of the
preferred shares. In addition, the accrual of the quarterly dividend was
reduced by the retirement of the repurchased shares. Including the
preferred stock dividend, related accretion and gains on repurchases,
net income available to common shareholders was $0.79 per diluted share
for the third quarter of 2012, compared to net income available to
common shareholders of $1.27 per diluted share in the second quarter of
2012 and $0.24 per diluted share for the third quarter a year ago.

Third Quarter 2012 Highlights (compared to third quarter 2011
except as noted)

Net income was $15.6 million, compared to $6.0 million in the third
quarter a year ago.

Revenues from core operations* increased 8% to $54.3 million.

The net interest margin was 4.22%, compared to 4.26% in the preceding
quarter and 4.10% in the third quarter of 2011.

Deposit fees and other service charges increased 10%.

Revenues from mortgage banking increased 142%.

Non-performing assets decreased to $59.1 million, or 1.38% of total
assets, at September 30, 2012, a 19% decrease compared to three months
earlier and a 61% decrease compared to a year earlier.

Non-performing loans decreased to $38.7 million at September 30, 2012,
an 18% decrease compared to three months earlier and a 53% decrease
compared to a year earlier.

The ratio of tangible common equity to tangible assets increased to
11.47% at September 30, 2012.*

Banner repurchased 40% of its senior preferred stock at an average
price of $959 per share.

*Earnings information excluding fair value and other-than-temporary
impairment (OTTI) adjustments (alternately referred to as other
operating income from core operations or revenues from core operations)
and the ratio of tangible common equity (which excludes other intangible
assets and preferred stock) to tangible assets represent non-GAAP
(Generally Accepted Accounting Principles) financial measures.Management
has presented these non-GAAP financial measures in this earnings release
because it believes that they provide useful and comparative information
to assess trends in Banner's core operations reflected in the current
quarter's results and facilitates the comparison of our performance with
the performance of our peers.Where applicable, comparable
earnings information using GAAP financial measures is also presented.

Income Statement Review

“The net interest margin expansion compared to a year ago reflects
continuing reductions in our funding costs, particularly deposit costs,
and a significant reduction in the adverse effect of non-performing
assets,” said Grescovich. “Further, similar to the immediately preceding
quarter, the yield on loans and net interest margin in the current
quarter were again augmented by the collection of some previously
unrecognized interest on certain nonaccrual loans.” Banner's net
interest margin was 4.22% in the third quarter of 2012, compared to
4.26% in the preceding quarter and 4.10% in the third quarter a year
ago. In the first nine months of the year, the net interest margin was
4.20% compared to 4.04% in the first nine months of 2011.

Deposit costs decreased by seven basis points in the third quarter
compared to the preceding quarter and 29 basis points compared to the
third quarter a year earlier. Total funding costs for the third quarter
of 2012 decreased seven basis points compared to the previous quarter
and 34 basis points from the third quarter a year ago. Asset yields
decreased 10 basis points compared to the prior quarter and decreased 21
basis points from the third quarter a year ago. Loan yields decreased
three basis points compared to the preceding quarter and decreased eight
basis points from the third quarter a year ago. Nonaccrual loans reduced
the margin by approximately five basis points in the third quarter of
2012 compared to approximately eight basis points in the preceding
quarter and approximately 21 basis points in the third quarter of 2011.
The collection of previously unrecognized interest on certain nonaccrual
loans added nine basis points to the margin in the current quarter ended
September 30, 2012.

“We have produced a solid increase in our revenues from core operations*
compared to the third quarter a year ago by growing core deposits and
reducing the drag on earnings from non-performing assets,” said
Grescovich. “We also had another quarter of very strong results from our
mortgage banking operations.” Third quarter net interest income, before
the provision for loan losses, was $42.7 million, compared to $42.3
million in the preceding quarter and $41.7 million in the third quarter
a year ago. In the first nine months of 2012, net interest income,
before the provision for loan losses, was $126.1 million compared to
$123.0 million in the first nine months of 2011. Revenues from core
operations* were $54.3 million in the third quarter compared to $52.3
million in the second quarter of 2012 and $50.1 million in the third
quarter a year ago. Year-to-date revenues from core operations* also
increased 8% to $157.0 million compared to $145.7 million in the same
period a year ago.

During the second quarter of 2012, Banner reversed most of its deferred
tax asset valuation allowance, reflecting Banner's return to
profitability and its expectation of sustainable profitability in future
periods. This expectation also led to the significant adjustment of the
fair value estimate for the junior subordinated debentures issued by the
Company. The substantial changes to both of these significant accounting
estimates were directly linked to the improved performance and
profitability of the Company. In the third quarter of 2012, Banner
reversed an additional $4.0 million of the deferred tax valuation
allowance, which substantially reduced the provision for income tax
expense for the quarter, and the remaining $3.0 million balance will be
recovered in the fourth quarter.

Banner's third quarter 2012 results included a $473,000 net gain for
fair value adjustments as a result of changes in the valuation of
financial instruments carried at fair value, which was largely offset by
$409,000 of OTTI charges related to certain equity securities issued by
government sponsored entities. In the preceding quarter, Banner recorded
a net loss of $19.1 million for fair value adjustments, which largely
resulted from a $21.2 million increase in the estimated value of the
junior subordinated debentures issued by the Company, which was
partially offset by increases in the estimated value of similar trust
preferred securities owned by the Company. Banner's year-to-date results
included net charges of $16.9 million for fair value adjustments
compared to a net gain of $1.2 million for the same period a year ago.
For the nine months ended September 30, 2012, OTTI charges were $409,000
compared to a recovery of $3.0 million for the nine months ended
September 30, 2011. The third quarter and year-to-date results included
an additional $2.5 million increase in the estimated fair value of the
junior subordinated debentures, which primarily reflects management's
judgment with respect to further tightening in general market credit
spreads. The impact of this adjustment was partially offset by similar
adjustments to the fair value estimates for certain investment
securities also carried at fair value.

Total other operating income (loss), which includes the changes in the
valuation of financial instruments, was a net gain of $11.7 million in
the third quarter of 2012 compared to a net loss of $9.1 million in the
second quarter of 2012 and a net gain of $10.3 million in the third
quarter a year ago. In the first nine months of 2012, total other
operating income was a net gain of $13.6 million compared to a net gain
of $26.8 million in the first nine months of 2011. Other operating
income from core operations* (total other operating income, excluding
fair value and OTTI adjustments) for the current quarter was $11.6
million, compared to $10.0 million for the preceding quarter and $8.4
million for the third quarter a year ago, reflecting strong growth in
deposit fees and other service charges and mortgage banking revenues.

As a result of continued account growth over recent periods and
increased customer activity, deposit fees and other service charges were
$6.7 million in the third quarter of 2012, compared to $6.3 million in
the preceding quarter and a 10% increase compared to $6.1 million in the
third quarter a year ago. Significant homeowner refinance activity
contributed to strong revenues from mortgage banking activities, which
increased 19% to $3.4 million in the third quarter of 2012, compared to
$2.9 million in the immediately preceding quarter. Income from mortgage
banking operations was $1.4 million in the third quarter a year ago.

“Operating expenses continued to decline in the third quarter compared
to the preceding quarter and the third quarter a year ago, largely due
to lower costs associated with loan collections and the real estate
owned portfolio, with the current quarter reflecting a net gain on the
sale of real estate owned, and a reduction in our deposit insurance
premiums,” said Grescovich. “While we do not anticipate regularly
recurring net gains on the disposition of real estate owned, we do
believe credit costs will continue to decline as we resolve remaining
problem assets.”

Total other operating expenses (non-interest expenses) were $33.4
million in the third quarter of 2012, compared to $35.7 million in the
preceding quarter and $41.0 million in the third quarter of 2011. In the
first nine months of 2012, total other operating expenses were $106.9
million compared to $119.4 million in the first nine months of 2011. The
decrease was largely a result of decreased costs related to real estate
owned and FDIC deposit insurance.

Credit Quality

“We made very good progress in continuing to reduce problem assets
during the third quarter and our credit costs continued to decline and
were significantly below those of a year ago. As a result of this
progress, all of our key credit quality metrics have further improved
and Banner's reserve levels remain substantial,” said Grescovich.

Banner recorded a $3.0 million provision for loan losses in the third
quarter of 2012, compared to a $4.0 million provision in the preceding
quarter and a $5.0 million provision in the third quarter a year ago.
The allowance for loan losses at September 30, 2012 totaled $78.8
million, representing 2.45% of total loans outstanding and 204% of
non-performing loans. Non-performing loans decreased 18% to $38.7
million at September 30, 2012, compared to $47.4 million three months
earlier, and decreased 53% when compared to $83.1 million a year earlier.

Banner's real estate owned and repossessed assets decreased 21% to $20.4
million at September 30, 2012, compared to $25.8 million three months
earlier, and decreased 69% when compared to $66.5 million a year ago.
Net charge-offs in the third quarter of 2012 totaled $4.4 million, or
0.14% of average loans outstanding, compared to $5.3 million, or 0.16%
of average loans outstanding for the second quarter of 2012 and $10.9
million, or 0.33% of average loans outstanding for the third quarter a
year ago.

At September 30, 2012, Banner's non-performing assets were 1.38% of
total assets, compared to 1.73% at June 30, 2012 and 3.53% at September
30, 2011. Non-performing assets decreased 19% to $59.1 million at
September 30, 2012, compared to $73.2 million three months earlier, and
decreased 61% when compared to $151.6 million a year ago.

Balance Sheet Review

“Despite the continuing adverse impact of refinancing activity on
residential mortgage loan balances, total loans outstanding were
essentially unchanged for the quarter. Aside from seasonal increases in
construction and agricultural loans, net loan originations and credit
line utilizations have remained disappointing, as the weak economy
continues to temper loan demand by both businesses and consumers. We
expect a continued challenging economic environment going forward as
businesses and consumers maintain a cautious approach to spending and
borrowing,” said Grescovich. “However, we believe the well-focused
efforts of our bankers will allow us continued opportunity to capture
increased market share.”

Net loans were $3.13 billion at September 30, 2012, compared to $3.14
billion a year ago, and unchanged compared to three months earlier.
Commercial and agricultural business loans were $822.7 million at
September 30, 2012 compared to $811.8 million at June 30, 2012 and
$792.4 million at September 30, 2011. Commercial real estate and
multifamily real estate loans were $1.22 billion at both September 30,
2012 and June 30, 2012 compared to $1.20 billion at September 30, 2011.

The aggregate total of securities and interest-bearing deposits
increased to $764.4 million at September 30, 2012 compared to $729.3
million at June 30, 2012, but was slightly less than $783.2 million at
September 30, 2011. The change in the mix of interest-bearing deposits
and securities holdings compared to a year ago reflects a modest
extension of the expected duration of this aggregate position designed
to increase the yield relative to interest-bearing deposits. The
securities purchased in recent periods were primarily short- to
intermediate-term U.S. Government Agency notes and mortgage-backed
securities and, to a lesser extent, intermediate-term tax-exempt
municipal securities. The average duration of Banner's securities
portfolio at September 30, 2012 was 4.4 years.

Deposits totaled $3.49 billion at September 30, 2012, compared to $3.43
billion at June 30, 2012 and $3.54 million at September 30, 2011.
Non-interest-bearing account balances increased 14% to $919.0 million at
September 30, 2012, compared to $804.6 million at June 30, 2012, and
increased 20% compared to $763.0 million at September 30, 2011.
Interest-bearing transaction and savings accounts were $1.48 billion at
September 30, 2012, compared to $1.45 billion at June 30, 2012 and $1.46
billion a year ago.

“The improvements in our deposit mix are reflective of further
successful execution of our super community bank strategy that is
lowering our funding costs by reducing our reliance on high-priced CDs,
growing new client relationships, and improving our core funding
position. All of this growth is organic growth from our existing branch
network,” said Grescovich. Banner's cost of deposits declined seven
basis points to 0.41% for the quarter ended September 30, 2012 compared
to 0.48% for the quarter ended June 30, 2012, and declined 29 basis
points from 0.70% for the quarter ended September 30, 2011.

Total assets were $4.27 billion at September 30, 2012, compared to $4.22
billion at the end of the preceding quarter and $4.29 billion a year
ago. At September 30, 2012, total stockholders' equity was $566.1
million, including $72.2 million attributable to preferred stock, and
common stockholders' equity was $493.9 million, or $25.43 per share.
Banner had 19.5 million shares of common stock outstanding at September
30, 2012, compared to 17.0 million shares of common stock outstanding a
year ago. At September 30, 2012, tangible common stockholders' equity,
which excludes other intangible assets and preferred stock, was $489.1
million, or 11.47% of tangible assets, compared to $460.3 million, or
10.92% of tangible assets, at June 30, 2012 and $394.3 million, or 9.20%
of tangible assets, a year ago.

Banner Corporation and its subsidiary banks continue to maintain capital
levels significantly in excess of the requirements to be categorized as
“well-capitalized” under applicable regulatory standards. Banner
Corporation's Tier 1 leverage capital to average assets ratio was 14.29%
and its total capital to risk-weighted assets ratio was 19.01% at
September 30, 2012.

Conference Call

Banner will host a conference call on Thursday, October 25, 2012, at
8:00 a.m. PDT, to discuss its third quarter results. The conference call
can be accessed live by telephone at (480) 629-9692 to participate in
the call. To listen to the call online, go to the Company's website at www.bannerbank.com.
A replay will be available for a week at (303) 590-3030, using access
code 4565884.

About the Company

Banner Corporation is a $4.27 billion bank holding company operating two
commercial banks in Washington, Oregon and Idaho. Banner serves the
Pacific Northwest region with a full range of deposit services and
business, commercial real estate, construction, residential,
agricultural and consumer loans. Visit Banner Bank on the Web at www.bannerbank.com.

This press release contains statements that the Company believes are
“forward-looking statements.” These statements relate to the Company's
financial condition, results of operations, plans, objectives, future
performance or business. You should not place undue reliance on these
statements, as they are subject to risks and uncertainties. When
considering these forward-looking statements, you should keep in mind
these risks and uncertainties, as well as any cautionary statements the
Company may make. Moreover, you should treat these statements as
speaking only as of the date they are made and based only on information
then actually known to the Company. There are a number of important
factors that could cause future results to differ materially from
historical performance and these forward-looking statements. Factors
which could cause actual results to differ materially include, but are
not limited to, the credit risks of lending activities, including
changes in the level and trend of loan delinquencies and write-offs and
changes in our allowance for loan losses and provision for loan losses
that may be impacted by deterioration in the housing and commercial real
estate markets and may lead to increased losses and non-performing
assets and may result in our allowance for loan losses not being
adequate to cover actual losses and require us to materially increase
our reserves; changes in general economic conditions, either nationally
or in our market areas; changes in the levels of general interest rates
and the relative differences between short and long-term interest rates,
loan and deposit interest rates, our net interest margin and funding
sources; fluctuations in the demand for loans, the number of unsold
homes, land and other properties and fluctuations in real estate values
in our market areas; secondary market conditions for loans and our
ability to sell loans in the secondary market; results of examinations
of us by the Board of Governors of the Federal Reserve System and of our
bank subsidiaries by the FDIC, the Washington Department of Financial
Institutions or other regulatory authorities, including the possibility
that any such regulatory authority may, among other things, institute a
formal or informal enforcement action against us or any of the Banks
which could require us to increase our reserve for loan losses,
write-down assets, change our regulatory capital position or affect our
ability to borrow funds or maintain or increase deposits, or impose
additional requirements and restrictions on us, any of which could
adversely affect our liquidity and earnings; legislative or regulatory
changes that adversely affect our business including changes in
regulatory policies and principles, or the interpretation of regulatory
capital or other rules including changes related to Basel III; the
impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act
and the implementing regulations; our ability to attract and retain
deposits; increases in premiums for deposit insurance; our ability to
control operating costs and expenses; the use of estimates in
determining fair value of certain of our assets and liabilities, which
estimates may prove to be incorrect and result in significant changes in
valuations; staffing fluctuations in response to product demand or the
implementation of corporate strategies that affect our workforce and
potential associated charges; the failure or security breach of computer
systems on which we depend; our ability to retain key members of our
senior management team; costs and effects of litigation, including
settlements and judgments; our ability to implement our business
strategies; our ability to successfully integrate any assets,
liabilities, customers, systems, and management personnel we may acquire
into our operations and our ability to realize related revenue synergies
and cost savings within expected time frames and any goodwill charges
related thereto; our ability to manage loan delinquency rates; increased
competitive pressures among financial services companies; changes in
consumer spending, borrowing and savings habits; the availability of
resources to address changes in laws, rules, or regulations or to
respond to regulatory actions; our ability to pay dividends on our
common and preferred stock and interest or principal payments on our
junior subordinated debentures; adverse changes in the securities
markets; inability of key third-party providers to perform their
obligations to us; changes in accounting policies and practices, as may
be adopted by the financial institution regulatory agencies or the
Financial Accounting Standards Board including additional guidance and
interpretation on accounting issues and details of the implementation of
new accounting methods; the economic impact of war or terrorist
activities; other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products and
services; and other risks detailed in Banner Corporation's reports filed
with the Securities and Exchange Commission, including its Annual Report
on Form 10-K for the year ended December 31, 2011. We do not undertake
and specifically disclaim any obligation to revise any forward-looking
statements to reflect the occurrence of anticipated or unanticipated
events or circumstances after the date of such statements. These risks
could cause our actual results for the remainder of 2012and
beyond to differ materially from those expressed in any forward-looking
statements by, or on behalf of, us, and could negatively affect our
operating and stock price performance.